tv Options Action CNBC October 10, 2009 6:00am-6:30am EDT
what i was seeing in the financials was a whole lot of, hey, i think we're probably in safe territory here. i saw some down side. 46 put selling in jp more fan. this is a mildly bull, bet. goldman sachs 175 puts also selling. same story. there. >> i say that the vix at 23, doesn't seem to be a lot of fear going on in front of this earnings cycle here. so we didn't see a lot of positioning for next week's earnings and some of the very big financial names. >> that's right. a lot of what we saw was really tepid. there was a tremendous amount of volume in citigroup. but that is de option trader stuff. those are guys just trying to make markets and make money on the spread. so you have to discount that a little bit.
>> you are a little surprised? volatility is so low and you're heading into the big earnings season, have you seen third quarter gains of 25% in the sector, seems to me this is the time to buy your protection. >> i think that is one of the more excellent points here. a lot of the moves priced into the options in terms of going into earnings next week, they're moves that are in line with what we've seen which makes some of the options pretty attractive if you do want to protect here. and again, to mike's point, given that first week is really one of the critical points with earnings, given that there is nothing crazily being priced in here, it could be an opportunity to buy protection in some of the name that you own. a key point i would also say that we're seeing, so we do have the earnings plays coming up. but we do continue to see people looking for longer data protection. an issue that scott brought up. that continues to be a theme here. >> we spent the last six months
with the markets rallying 27%, offering protective trade. we're not going to do it anymore, people. the market is going one way here. >> it's at the top. >> that's just me. i threw in the towel, there people. >> if we finally waved the white flag, then you should listen to what we said two months ago. >> j.p. morgan is the last financial trade. typically what happens to the pricing of options after we get that first report? we have an interesting calendar. not only do we have the financials starting to report, we have expiration on friday. dan? >> a lot of the options for next week have dollar cheap. they're expiring on friday. a lot of people will look at the options and they're at the money. a $17 stock or something is 45 cents. you're going to say maybe i want to punt. that but the truth is that is an expensive option if you think about it. you only have a few days to expiration. you don't have a lot of time to earn it out. >> let's get to a specific trade here. mike, you have one on bank of america. >> i'm going along with the theme of things we saw in goldman sachs, j.p. morgan.
bank of america is one of the stocks they've actually do have earnings coming out next week. there is a another potential catalyst issue after lewis steps down, what is going to happen on the management side? what i'm looking is for premium. i'm going to sell the 17.5 put. i'll sell that for $1.75. it's 10% of the stock price. it is basically right at the money. i'm protected down to about $15.75. that way i'm long the stock at that level. and, you know, if it goes up a little bit, i make 10%. >> let's talk about what means to sell a put. you're collecting the premium. >> in a way, i'm kind of way we're saying wow, wow. somebody will pay me to do it. >> we're really throwing in the towel.
we're selling down side puts. this is a very mine company. the next year or so will be a defining period for the company. it will be a great it will be a great investment. between now and then this is flat lining. it seems like a dangerous put sale. actually, it hasn't traded below $16 since late july. >> 190%, it is $2.5 low. but this is one of the things that you can say it's a bonus. >> i think it's a key point you have to keep in mind is this is a trade for somebody as mike said who has that limit order out there. if you put that order out there, this is going to be a more attractive trade.
can you actually capture premium if it does continue to be flat. but you're really not participating on the upside. you have to be careful labelling it and think about the margin. >> participation on the up side, you're going to collect 10% of the stock. the rallies will get 10%. that is one quarter. that is 40% annualized. >> we talked about this stock i think flat lined. if it continues to flat line, that's a great thing. think about the way this can play out. the stock can go a bunch lower. that's not very good. but you're going to be better off than if you bought the stock. the stock can stay here and collect that premium. the stock can go higher. you continue to collect that premium. there are three things that can happen. two are good and one is less bad. >> i want to make one quick point. >> last point. >> this is a dangerous trade. there is a lot of uncertainty here. the ceo just stepped down. who knows what's going to happen? who knows how they're going to be able to give guidance going forward. >> i can sell. i think, you know, you want to be cautious. >> let's move on here. >> time to make the call where
the traders give you the best directional bet using options. chip giant intel set to report earnings on tuesday. dan thinks that could be poised for a big move. you have a trade that is no riskier than buying the stock that could cost you less. wow, dan? big promises. >> you know, i'm going to turn around with my criticisms. i actually, you know this is one where i don't think there is a whole heck of a lot of uncertainty here. the company preannounced in late august. they held a developer's forum. and so, you know, we have a lot of information about this company in a very short period of time. they report next week. what i want to do rather than buying the stock, i want to look to do -- i want to buy in october 1921 risk reversal. what am i doing here? i'm selling the october 19th put for 15 cents and using the proceeds to buy the october 21 call for 30 cents. the package costs me 15 cents. okay. so what are the risks here? how i do make money? if the stock on october expiration between now and next friday using this catalyst of
earnings is above $21.15 up 5%, i start to make money. if the stock is below, between $21.15 and $19.15, i can lose 15 cent premium and below $19.15 i get long on the stock. that's my risk. this is a tactical trade around earnings. i feel comfortable with the down side and going down 5% if it does go that low. >> one of the things you have to keep in mind with this trade here, here are my concerns with this trade. so in terms of the up side, you're actually not participating until the stock up almost 5% here. and this is very critical the week of expiration. so this option, it's not as if it's going to still have a lot of premium value left to it. after this event is over, you're going to pretty much know the true value of that option. you're looking for intel to really have an over 5% move to participate on any upside. that is compared to buying the stock. the flip side is you're opening yourself up to having to buy it if there is a pull back on the down side. is that any different than buying the stock? no.
it is costing you a lot less. that risk is very similar. you don't get the same participation on the up side that you would by owning. >> you mentioned the average. we looked at what intel typically moves in the past eight quarter 5%. so it doesn't seem to be completely off the table. >> i think it is bearish here. it is pricing in the fact that they got a bit more comfortable with what this quarter is going to look like. >> what do you think about the fact that intel will have a good run in the last two years? >> it's had a very good run. this is a dow component. this is not broadcom, guys or one of the high data names. it's one of the largest cap stocks in the market. it's in line with the market. but one of the things i feel comfortable with here is that, you know, there is no bomb being dropped here. they have already preannounced. >> i think i would like a trade that would participate but move somewhere in that range, move the amount and not participate.
it leaves you with two potential decisions to make. a decision to make if it does rally through there. a decision to make if it doesn't do a whole lot. >> do it like that. i usually like to get paid. so less enthusiastic about that. >> the thing about this is this company, if it gets down there, it's a 19.15, i want to buy it. this goes to your trade. you have to think about the fact that when it's down there, i wanted to buy it here. because you know, it's easy to say ooh, you know, i didn't expect this. >> remember -- >> but, scott, if that -- last word. >> last word to dan. >> the stock is up in line with the nasdaq. the stocks which is a primary component up 53%. the stock up is 37.a%. they give the guidance at the street investors are looking for, you'll see a collapse of that stock. >> let's move on here. because it is a huge earnings week, we'll give you a bonus edition of "make the call." intel isn't the only big tech name out. google set to report on thursday. one share will cost you around $520. that is a strategy that can get you long for just under $10. stacy, what is that strategy?
>> google is one of the stories that analysts love it. the sentiment is bullish. the sentiment within the options trading seems to be some up side potential here with the concentration buying the out of the money up side calls. typically a strategy i'm not a huge fan of heading into an event like earnings. but i do want to participate in an upside move here. so what i was looking at with a call spread, i don't want to spend $520 for the stock. i do want to participate on that up side. i was looking to buy the $520 call spread. looking to buy the october $520 call offered at $13.70 and finance that with the net-net, that's going to cost me $9.50. the potential being if at expiration the stock is $5.50 or
above that, call spread worth $20. so i spent $9.50 to win $20.50. so i do like the odds. and one of the other things that i think is interesting with this trade, i mentioned there were those upside call buyers. what i'm doing is selling those options that have actually gotten a little bit of a lift here as the volatility is a premium as everything is kind of gone up with supply and demand. i like selling. that i'm selling that at a level that is up roughly 5%. that is the implied move in google right now. that is close to what it averages. i actually don't mind selling that upside move which is really more in line with the average. >> stacy, before we open it up to the guys here on the desk, because they're champing at the bit, you're risking $9.50 to make $20.50. how do you defy that ratio? >> in this particular case, getting around a third. and, again, it's looking at that 5% upside move. i wanted to get something that was going to give me odds that i thought were a bit better than
what street sentiment was and still capping where i think that implied move to go. >> dan, i think you're -- >> i'm champing at the bit here. i can't the stand this company. i can't stand the stock or the options trade. i think that -- >> how do you really feel, dan? >> the truth is, if i own the stock and i like listening to stacy, which i do occasionally, i would sell the stock and buy the call spread and try to trade this around earnings. listen, you know this is a company that they don't give -- they don't really care what the street thinks. they don't give forward guidance. >> they don't what? >> i got a little fired up. >> but, you know, they don't care what the street has to say about the guidance and that sort of thing. you know, the advertising cycle, they start to ramp and may start hiring again. the margins may get squeezed. that may cause the stock to have a little lull. >> i like google. they don't play the street's game. >> they don't give guidance. >> they're going to do their business and make money. one thing about stacy's trade is
it is fully priced and she is spending a third of the call spread. that is just about all i would ever spend to get long. >> but let's make a quick point about this. this is a really expensive stock. and there have been emphasis in the past. they had advertising revenue. you may be concerned about the top line in google. that could create a little disappointment. i usually hate verticals in the catalyst on the long side. but this actually is one of those circumstances where i do like it. you're only risking about 2% of the existing stock price right now. expiration is next week. i think that if you're going to make a bullish play in google, this is the smartest way to do it. >> we're giggling on the desk because mike is siding with you. but you get the final word. >> no, you know -- put yourself against dan. >> well -- come on. that's way too easy. i'm sure dan was out way last night watching the rockies. he's suddenly a rockies fan here. to dan's point, you have to pick a direction. this is where dan and i disagree every single week. i picked a direction here. he may not like the direction. but if you're going to pick a direction this is definitely the smarter way to play. you could do the flip side and
do a put if you want to be more of a bear here. the thing i don't want to do is buy an upside call and just hope that google really hits a home run here. i'd rather risk my money in a more reasonable fashion and i think the risk-reward is much more attractive. >> we're going to take a break and everybody is going to calm down. after the break, alcoa is up 12%. the strategy returned 30% on the cash. we'll give you the next move after this. >> time for pump up the volume. heating up option traders. this computer networking game specializes in switchers that connect data to desk tops at lightning speed. but this week there were reports that they were looking to make a connection of a different sort. the options market went mad. who is it? the answer when "options action" returns. the
story that brocade put itself up for sale. what i found the most interesting, the volume was up substantially. it picked up in the front two months, october and november. november being the latter half of this week. real concentration suggests there is upside, probably not significantly above 13 or 15. there was not a lot of longer dated activity trading. it does look like people are positioning for a resolution by november expiration. >> okay. there you have it. before the break, we gave you three ways to make money off earnings season. last week mike offered a trade on alcoa and so far it's working out. on options action we're not only looking to risk less but possibly make more, we're also trying to increase your odds of success. and last week mike did just that with alcoa. >> i'm going to look here is sell the january 12.5, 10 put. >> enough with the lingo, mike. let's break that down.
investors sell a put spread, they're doing two things. they are selling, one out of the money put and then buying a lower strike put of the same expiration. the goal, to profit, whether the stock goes up, does nothing or even trades down a bit. three ways to make money. that's increasing your odds. so let's take a look at how mike did his trade. thinking alcoa stock would trade higher, he sold the alcoa january 12 1/2 strike put and collected $1.35. if alcoa trades up or even sideways between now and the end of january, mike keeps that money. >> i'm looking actually to take advantage of the range bound season. >> if the stocks tumble, mike would be forced to buy alcoa at the strike price of the put he sold. or in this case, $12.50 and be exposed to downside losses. to protect himself, mike then bought the january 10 strike put for 45 cents. what's the most he can make? well, between the $1.35 he
collected selling the higher strike put and the 45 cents mike paid for the lower strike put, he made a total of 90 cents. that's a maximum profit. now for the bad news. what's the most he could lose? to the difference between the strike prices and the put that he sold and bought. or in this case, 1 it.5 minus 10 or 2.50. remember, mike collected 90 cents on this trade. that acts as a cushion. his losses top out at 1.60. here's the tradeoff. mike risking $1.60 to make a potential 90 cents. >> that's 40% of the total value this spread could collect. >> alcoa shares were trading for 13 bucks. since then, shares have raised 12%, allowing mike to close out his put spreads at a profit. with mike sitting pretty he now faces a dilemma, take the money and run or wait and play for more gain.
♪ go on and take the money and run ♪ >> here is the money that he saved. keep the trade on, hope alcoa stays at 12.50, buy back that put spread at current prices mike would make about 40 cents and forfeit a potential 50 cents on profit side. mike, no pressure. "options actions" fans are at the edge of their seats. what are you going to do? >> a couple quick points i would make here. there was a catalyst but it wasn't exclusively a catalyst play. your downside break even was $11.60. that remains true. one of the things you don't want to do necessarily is a short, cheap put. the risk profile begins to diminish. i don't think it diminished quite enough. you get an opportunity to take this thing off at an even better level. probably if i get another 10 cents to 15 cents, i'll look to cover it. >> you agree, scott? >> absolutely. the alcoa story makes sense. it's easy to pat yourself on the back when you have a winner and
take the profit. this is still a juicy trade. there's no reason to take it off just because you have a profit. in addition, there's the fundamental story, weaker dollar, alcoa should do well. there's no reason to take it off right now. >> you have the answer from mike. got a question, send us an e-mail. we'll answer it during the options action 101 web extra. go to optionsaction.cnbc.com.
time now for the final call. the last word from the options pit. stacey, kick it off. >> i will be rooting for the phils. >> scott? >> i'm looking to see if companies do well even if they miss on the top line. if that's the case, then some of these long strategies are going to work out. >> dan? >> i want to give a quick shout out to my newest niece in boulder, colorado. >> mike? >> i'll keep an eye on the alcoa trade. i'm not going to do anything with it right now. >> looks like our time has expired. thanks so much for watching. i'm melissa lee. we'll see you back here next
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